Making Sense

  "Volatility is a double-edged sword. It can cut you both ways." OPEC+ announced Production cuts of 1.15 mbpd on Sunday thus pushing crude oil prices higher in the Asian session. WTI prices touched a high of USD 86.44 per barrel. The sharp cuts in production follow the previously announced production cuts in Oct 2022 of 2 mbpd and Russia’s 0.50 mbpd voluntary reduction announced in February. The cuts announced will take effect from May and stay until Dec 2023. These actions are in sharp contrast to Global Oil Demand projections of a rise of over 2 mbpd by both the IEA and OPEC. Do the actions by the OPEC+ suggest a worsening oil demand outlook in the second of the year? Or is it just an acknowledge of OPEC+ running behind production quotas and adjusting global demand mildly. The sharp productions cuts only make the inflation fight worse. The Fed Fund Futures markets pushed out rate cuts with July pricing in 4.88% from previous 4.80%. The US yields also moved higher i...

 The concluding remarks of the Monthly Bulletin are beautiful. It says, "In mythologies across civilisations, the sun is depicted as riding a chariot typically drawn by four horses. In Indian mythology, the sun's chariot is drawn by seven horses. The seventh horse represents dreams, aspirations and the future. It is said that even if the other six horses are injured or exhausted, the seventh horse can take the sun's chariot to it's destination" So dare to dream big and reach your destination whatever that may be. US markets were closed yesterday. Today the activity is muted with strength seen in USD index, higher US Treasury yields and domestic rates higher.  Yesterday, LAF injection stood at inr 41k crore with SDF at 105K crore and O/S Repo operations at 146K crore. WACR traded at 6.56% as liquidity tightens on GST outflows. OIS rates are about 1 - 2 bps higher / India 10Y Gsec is trading at 7.38% / Modified Mifor is 3 odd basis higher while forwards are trading ...

"Thorough preparation makes its own Luck" - As a trader, I couldn't believe in this more. We are all involved in a game where the outcome is probabilistic and that is the universal truth. But attributing the unknown to chance rather than lack of preparation is a fundamental error and sets us up for failure. Guard against failure through thorough preparation.  Know as much as you can to improve the edge and be thorough as hell. After all the satisfaction of doing it right supersedes the chance success.  Interesting moves overnight with a sharp rally in US Treasury yields on the back of a weak 30Y auction, initial jobless claims data at 196000 still suggesting a strong labor market data and sell off in equities.  US 2Y @ 4.50% ( T-1 low 4.41%) - On the 2Y we see a double bottom with a price objective of 4.48% which has been met. The next areas of support for the bond are at 4.57%, 4.61% and 4.73%. US 10Y @ 3.68% (T-1 low 3.575%) - US 10Y took support at swing low of 3.32% t...

"Accuracy of Observation is the equivalent of accuracy of Thinking" I wrote about the expectations from the MPC yesterday and as expected RBI hiked repo rate by 25 bps to 6.50%. Consequently, SDF rate now stands at 6.25% and MSF rate at 6.75%. MPC voted 4 - 2 for change in policy rate.  On the change in monetary policy stance, MPC voted 4 - 2 to maintain monetary policy stance " withdrawal of accommodation" Key Highlights from the MPC Rate decision 1. Global growth prospects have improved 2. Domestic growth is likely to be supported by higher Rabi acreage, sustained urban demand, improving rural demand, robust credit expansion, gains in consumer and business optimism and the government’s enhanced thrust on capital expenditure and infrastructure in the Union Budget 2023-24 3. While RBI acknowledged the continuing downward momentum in inflation in FY 24, it estimated inflation to rule above 4% (RBI has an inflation target of 4% +/- 2%) and domestic economic growth to...

GoI announced the Union Budget on Feb 1, 2023. The Budget has been applauded by participants for sticking to the fiscal glide path, increasing the allocation for capital expenditure to Inr 10 trn, no populist measures ahead of the Elections, continuity of tax regime and credible forward projections. Key Highlights: Fiscal Deficit target of 6.40% for FY 2023 and 5.90% for FY 2024 FY Gross Market borrowings of Inr 15.43 trn and net market borrowings of Inr 11.80 trn in dated securities and Inr 50000 cr in T-bills. The number was lower than market expectations of Inr 16 trn in gross borrowings. Total expenditure of GoI increased inr 242,000 crore which was financed by increase in revenue receipts of Inr 144,000 cr and higher borrowings of Inr 98000 cr. The rise in expenditure, to the extent of inr 200,000 crs was primarily on account of food and fertiliser subsidy.  For FY 24, the budget assumes nominal GDP Growth of 10.50%. The tax revenue is estimated to grow at 12%. While growth in...

 The big news today morning was the release of the Tokyo CPI Inflation. The core CPI for the area of Tokyo in Japan jumped 4.3% in January 2023, accelerating at the fastest pace since 1981 and exceeding forecasts for a 4.2% rise amid broadening inflationary pressure. Tokyo’s core inflation rate, a leading indicator for nationwide price trends, also followed a revised 3.9% gain in December and surpassed the Bank of Japan’s 2% target for the eighth straight month, signaling that upward price trends in the country have not reached its peak yet. **trading economics The BoJ announced the  Funds-Supplying Operations to Support Financing for Climate Change Responses for a notional of $ 21.73 bn as yields inched closer to the upper bound of the YCC band at 0.50%. The CPI data sparked a sell off in yields in the Asian session with US 2YT at 4.19% and US 10YT at 3.53% and the 2x10 inversion at 66 bps. Domestic yields also opened higher with 10Y treasury trading at 7.39% from Wednesday's...

I wrote in my earlier  blogpost - US Market Wrap  why I do not like to chase the current momentum lower in yields.  US2YT has been facing resistance at 4.18% since late November 2022 and though US yield fell below 4.18% to trade a low of 4.12%, the yields have since bounced back towards 4.18%. Likewise, the US10Y has been facing resistance at 3.44% since Dec 2022. The 10Y yields fell to lows of 3.32% last week to bounce back higher and currently trades at 3.47%.  Data releases last week pointed to deteriorating economic fundamentals on the Retail Sales (-1.1% mom), Industrial production (-0.70% mom), housing starts (-1.4% mom) and building permits (-1.60% mom). However, the labor market continued to be resilient with initial jobless claims at levels lowest since late Sep at 190K. This made me question if the current market pricing has run ahead of itself and the same is covered  here .

The BoJ amended the rules for a fund supply market operation to use it as a new tool to prevent long term interest rates from rising too much. Under the amended rules, BoJ can offer funds upto 10 years against collateral to financial institutions for both fixed and variable rate loans .  What is Fund supply operations against pooled collateral?  Also known as open market operations, are a monetary policy tool used by central banks to control the money supply in an economy. In these operations, the central bank provides funds to commercial banks in exchange for a collateral, such as government bonds. The central bank can use these operations to increase or decrease the money supply in the economy, depending on its monetary policy goals.  Financial institutions can therefore buy say 10Y JGBs at 0.50% and use it as a collateral to borrow funds from BoJ. This would keep the yield on JGBs. The BoJ simultaneously announced that it will offer 5 years loans under the fund supply...

Good morning !! The hard work in trading comes in the preparation. The actual process of trading, however, should be effortless. BoJ monetary policy meeting kept the yield curve unchanged at +/- 50 bps. It is the only Central Bank that has a NIRP (Negative Interest Rate Policy). The bank will continue with its current monetary policy of maintaining its short-term interest rate at minus 0.1% and its long-term interest rate around 0%. The Bank will offer to purchase 10Y JGBs at 0.50% every business day through fixed rate purchase operations unless it is highly likely no bids will be submitted. You may revisit the earlier decision  here . Earlier local media reports suggested that policymakers will be looking to review the side effects of current ultra-easy monetary policy and potential risks following the December move. This had lead to consternation among the market participants with market opinion widely divided between status quo / widening of the band / abandonment of YCC policy....

Expect the unexpected !! The Big news today morning is the Bank of Japan (BoJ) monetary policy decision. BoJ Governor Kuroda who is nearing an end to his term did not fail to shock and awe the markets.  BoJ decided to modify the conduct of YCC (Yield curve control) in order to improve market functioning and encourage a smoother formation of the entire yield curve while maintaining accommodative financial conditions. Please note the modification was not attributed to higher inflation. So BoJ tightened and eased at the same time. BoJ expanded the band around the 10Y yield target to +/- 0.50% from +/- 0.25% . It will offer to purchase 10Y JGBs at 0.50% every business day through fixed rate purchase operations. It will also make nimble responses for each maturity by increasing the amount of JGBs even more and conducting fixed rate operations. BoJ increased the monthly bond buying under the new quarterly bond buying plan to yen 9 trn from earlier yen 7.3 trn.  BoJ's monetary polic...